Protecting brands in China: a practical approach

This article sets out some of the issues a company should consider when looking to enforce its trade mark rights in China and was published in the April-June 2007 issue of PLC Cross-border Quarterly.

Counterfeiting is one of the major challenges facing companies in the current business environment, and the problem is exacerbated for those companies operating globally (see the Business Action to Stop Counterfeiting and Piracy (BASCAP) Global Survey on Counterfeiting and Piracy,www.iccwbo.org/bascap/id892/index.html). In addition to the economic loss that counterfeiting can cause, it can also damage a company’s reputation, which it may have spent years building.

Since its accession to the World Trade Organisation in 2001, the People's Republic of China (the PRC or China) has revised its trade mark laws and court procedures, and now offers companies better brand protection options, although critics argue that there is further to go. This article sets out some of the issues a brand owner looking to enforce its trade mark rights in the country should consider before seeking advice from its Chinese legal counsel. In particular it provides practical guidance on:

Setting goals for the enforcement exercise.

The available enforcement options.

Dealing with the growing trend towards the online sale of counterfeit goods (see box, Dealing with online counterfeiters: the new challenge).

Note that while this article intends to cover the most common counterfeiting situations in China it does not cover all forms of counterfeiting.

Setting goals

A brand owner which suspects that its rights have been infringed should first consider what its short and long term enforcement goals are.

In the short term, it may want to:

Stop the known infringers immediately.

ecover as much damages as possible.

In the longer term, the brand owner may want to:

Send the infringers to jail to create a deterrent effect (producing counterfeit goods is a crime in China).

Reduce the export of fake goods outside China.

Target some online sales of fake goods.

Enforcement options

The enforcement options available in relation to trade mark infringement in China are administrative actions, civil litigation, criminal prosecution and customs seizure.

Administrative actions

Four government offices in China are responsible for undertaking intellectual property (IP) administrative actions. There are the:

State Administration for Industry and Commerce (SAIC) (which supervises the Trade Mark Office of China).

Quality and Technical Supervision Bureau (QTSB).

National Copyright Administration (NCA).

State Intellectual Property Office (SIPO).

The first two bodies are responsible for dealing with trade mark infringements, while the latter two handle copyright and patent cases respectively.

Both the SAIC and the QTSB have offices from the district to national level. In most of the major cities, the QTSB only has jurisdiction over factories and warehouses, while the local Administration for Industry and Commerce (AIC) can search all business premises. The AIC can penalise businesses distributing goods bearing similar trade marks while the QTSB only has the power to seize counterfeit goods (that is, those goods bearing an identical trade mark) or goods of inferior quality or that have been labelled improperly.

According to statistics, in 2005, the AICs determined 49,412 trade mark infringement cases; over 7,000 tonnes of counterfeits were destroyed and fines amounting to RMB34.2 million (about US$4.39 million or EUR3.39 million) were imposed. The QTSB handled over 180,000 cases in 2006 but only a fraction of these were IP related.

During a raid, any counterfeit goods and books of account are seized. If the seizure is large, the AIC or QTSB then decides whether to transfer the case to the police for criminal prosecution. Whether a case will be transferred or not depends solely on the total value of the counterfeit products; it must meet an “illegal turnover” threshold (see below, Criminal prosecution).

When the AIC or QTSB determines the value of the illegal turnover, two issues arise:

Invoices relating to prior sales. During the raid, the AIC or QTSB may find invoices regarding prior sales. However, experience indicates that previous sales by counterfeiters that are reflected in the books of account are rarely considered part of the illegal turnover, for lack of collaborated evidence, unless the counterfeiters make full confessions.

The unit price of the counterfeit goods. Complex issues arise regarding the unit price used in relation to the counterfeit goods to calculate the illegal turnover, that is, whether the retail, wholesale, at cost or genuine price is used. Practice differs widely between cities and agencies. Determining which unit price to use can slow down the process of transferring the administrative case to the police or even deter the AIC or QTSB from doing so at all. The PRC Supreme People’s Court and the SAIC have issued notices in relation to which unit price should be adopted when calculating the illegal turnover (see, for example, Interpretation by the Supreme People's Court and the Supreme People's Procuratorate on Several Issues of Concrete Application of Laws in Handling Criminal Cases of Infringing Intellectual Property, effective from 22 December 2004).

The AIC or QTSB can call the police to take over the case from the scene of a raid, or transfer the files to the police after gathering all of the evidence. If the threshold is met, the brand owner should ensure that its legal counsel liaises with the different agencies involved to ensure that the case is transferred to the police.

If the AIC or the QTSB decides to impose an administrative penalty, it can fine a counterfeit producer up to three times the amount of the illegal turnover. In reality, however, the level of fine is not usually enough to deter a factory from resuming counterfeit production, which normally happens quite soon after a raid. In addition, the factory may adopt tactics to avoid future detection, such as ensuring that its workers only affix trade mark labels and pack boxes with goods a couple of hours before loading them into containers (which usually happens late at night or on the weekends).

Civil litigation

In light of the above, a brand owner may find that civil litigation is preferable to an administrative action. Following amendment of the PRC Trade Mark Law and various court procedures since 2001, foreign brand owners no longer need to prove damages by providing their accounts and sensitive business information to the court and infringers. If actual loss cannot be proved or the actual gain by the infringer cannot be determined, a claimant can request damages of up to RMB500,000 (about US$62,230 or EUR49,620) based on the discretion of the court and the fame of the trade mark (known as statutory damages).

However, if a brand owner chooses this route, it must still collect evidence to prove infringement. Even if its investigators have collected evidence of infringing products by way of sample purchase, it will be difficult to prove the total sales or turnover. The brand owner should therefore consider applying for an evidence preservation order, which will help it to obtain evidence from the defendant with the assistance of the court.

One issue regarding civil litigation in China is that the courts do not adopt the same “discovery” procedures as those used in common law courts. This lack of discovery procedures makes an application for an evidence preservation order a prerequisite in almost all IP cases.

An evidence preservation order is very similar to an Anton Pillar order, in that judges, and sometimes lawyers, go into the business premises of the defendant to search for evidence of infringement before the complaint is served. Sometimes, the court simply issues a written order requiring the defendant to produce documents to the court before a certain time. The latter is very similar to the specific discovery procedures used at common law.

The court normally grants an evidence preservation order if the claimant genuinely believes that evidence in its favour, such as transaction records and moulds, will not be discovered by normal means. According to the Supreme People’s Court’s statistics, 470 applications for evidence preservation orders were filed in China from 2001 to October of 2005, of which 445 were granted. Most courts are now receptive to such applications as well as applications to freeze the defendant’s assets.

However, the courts are still reluctant to grant preliminary injunctions. This is particularly so if the amount of cash bond put up by a claimant is not high enough or if the court is dissatisfied by the arguments put by the claimant to demonstrate that there is an “irreparable loss” or urgent need.If a brand owner is uncertain whether the court will approve its asset preservation and preliminary injunction applications, it should consider raiding the suspect factory with the AIC or QTSB first, which in practice serves the same purpose as obtaining an order. All evidence collected from an administrative raid is good evidence at trial.

The statutory limitation period for bringing a civil claim is two years from the date the claimant knew or should have known of the infringement. If an infringement was discovered more than two years ago but is still continuing, there is no limitation period for filing the court proceedings, but the period for which damages can be claimed is limited to two years.

The trial itself takes place in open court after the exchange of evidence. Sometimes, the trial and the exchange of evidence can take place on the same day. Each party is given the opportunity to file a brief after the trial to restate its trial argument.

Criminal prosecution

Since December 2004, China’s courts and police have adopted a much lower illegal turnover threshold to trigger criminal prosecution of the owner and the responsible employees of an incorporated company for producing counterfeit product. That threshold is RMB150,000 (about US$19,270 or EUR14,890). A 40% discount on this figure applies if more than one brand is produced. The threshold applicable to counterfeiting individuals or unincorporated bodies is, however, only RMB50,000 (about US$6,453 or EUR4,987). Brand owners have criticised the inconsistency between these two thresholds as lacking legal justification.

On 5 April 2007, two months after this article was published, the Supreme People’s Court abolished the double-standard. Now, the criminal threshold applicable to individual and company is RMB50,000.

The threshold to trigger a higher level of prison sentence, that is three to seven years, is five times the above thresholds i.e. RMB250,000. For instance, if a factory produced more than one brand and the total seizure by the AIC is valued at over RMB150,000 (about US$19,280 or EUR15,000), the court is bound to hand down a jail term of three to seven years. Any jail terms below (and including) three years can be suspended (Article 72, PRC Criminal Law).

In 2005, police investigated 1,799 IP-related criminal cases, worth around RMB128 million (about US$16.44 million or EUR12.7 million). The vast majority of these cases have been prosecuted with convictions reached.

Note, however, that criminal penalties only apply if the mark in use is “identical or confusingly similar” to the registered trade mark in respect of identical goods (Article 213, Criminal Law). As a result, older registered trade marks may not provide sufficient coverage to ensure criminal sanction, as the goods in question may not be identical (particularly in light of recent technological advances).

The “product quality” offence (Article 140, Criminal Law) is a useful supplement to IP criminal enforcement, particularly when the products seized are yet to be affixed with any trade mark. This offence is committed by anyone who produces fake or inferior products (defined as products below national or industry standards, as determined by the state QTSB), and normally results in a higher sentence for the offender, and may even lead to life imprisonment. There is a high chance that a counterfeit product will also be of inferior quality.

The Public Security Bureau (PSB) investigates all criminal matters. The internal division of the PSB in charge of handling trade mark crime is called the Economic Criminal Investigation Department (ECID). The division in charge of handling product quality and copyright crime is the Public Order Department (POD). In a few cities, the function of the POD has been merged with that of the ECID.

When brand owners report a new case to the PSB, they face the dilemma of whether the illegal turnover threshold has been met (see above). Without seizing the goods from the offending factory, brand owners cannot prove that this threshold has been met, and the PSB sometimes refuses to act on the basis of a “reasonable suspicion”. For these reasons, brand owners might prefer to pursue an AIC raid (see above, Administrative actions), followed by a transfer of the matter to the PSB for criminal prosecution.

If the PSB is satisfied with the evidence put forward and decides to accept the case (known as “li an” in Chinese, meaning “formally docketed”) it will conduct a raid on the factory and arrest any suspects at the scene (known as “administrative detention” under PRC law). It then has about five weeks to submit the case to local prosecutors to approve the “formal arrest”. In some cases, the PSB may have sought the formal arrest order from prosecutors before its raid.

Once the suspects have been formally arrested, the decision on whether bail should be granted will fall on the prosecutors. It is important to request that police bail is not granted, as suspects may abscond if the likely prison sentence is long.

The trial is usually held a few months (up to a year) after the formal arrest. At the trial, brand owners are encouraged to send an employee to read out a “victim’s statement” in court to the judges. Brand owners can appoint lawyers to cross-examine suspects to find out more information, such as the identity of the product buyers.

If the judgment is unfavourable, the brand owner’s only option is to apply pressure to the prosecutors to appeal the court’s decision, but it is rare that prosecutors will do this unless there is an obvious mistake in the decision. As long as the court has exercised its discretion within the boundary of the law (such as suspending the sentence or imposing a fine instead of imprisonment) brand owners have no legal recourse other than filing a separate civil action.

Customs seizure

In 1995, PRC Customs set up a special branch charged with recording trade marks and seizing import and export counterfeits of recorded products. Its practices have significantly improved since the latest version of the customs regulations came into effect on 1 March 2004 (Regulation for Customs Protection of Intellectual Property).

In particular, the new regulations have:

Extended the period for which trade marks, copyright or patents can be recorded with Customs from seven to ten years.

Required that Customs set up a computerised network for brand owners to update details of authorised factories.

Capped the customs bond to be paid by trade mark owners at RMB100,000 (about US$12,850 or EUR9,925) for any shipment exceeding this amount.

Provided an option for brand owners to request temporary seizure of any branded products that are not recorded with Customs.

Once a trade mark is recorded with Customs, a brand owner’s local office or trade mark agents will be informed if any suspect shipment is intercepted. Customs requires the brand owner to file a written seizure request and wire the bond within three working days. Brand owners can also file a list of authorised factories and exporters in China that are licensed to manufacture and export. If this is done, Customs will release the shipment if the name of the exporter matches one on the list.

In some circumstances, brand owners and their lawyers can also file ad hoc requests to seize certain outgoing shipments on an urgent basis. This may require long term planning and intensive surveillance at the targeted factory before such a request is made to Customs.

According to PRC Customs, around 2,473 (from 1,210 in 2005) export seizures concerning IP infringement were made in 2006, valued at about RMB204 million (about US$26 or EUR20 million). Customs is in general very responsive to complaints regarding the export of counterfeit products. It is currently working on a more efficient mechanism for reporting cases to the local PSB after containers containing counterfeit product are intercepted.

As in most other jurisdictions, online sales of counterfeit goods have become a rapidly growing problem in China. The law provides limited remedy for brand owners to sue an offending internet service provider (ISP) for vicarious infringement in respect of providing shelter and storage to the counterfeit producer (the primary infringer) after being put on notice. In addition, it is difficult for brand owners to prove infringement and identify the infringers because, in China (as in most countries), they have limited access to the internet protocol addresses and bank accounts used by online counterfeiters.

Most reputable ISPs and business-to-business portals now have a standard takedown procedure in place to remove any counterfeit products from their websites once identified. The problem rests with a large number of small websites. The typical features of these small websites are:

They do not keep stock at their office premises.

They tend to locate their offices in residential areas.

Transactions are done through small banks or remittance agencies.

Online sales of counterfeit goods will remain a major problem in China until the law is changed to give the Administration for Industry and Commerce powers such as the ability to request internet protocol information from ISPs, to seize sales proceeds and to cut off ISPs’ telephone lines. A brand owner’s only real hope at present is that PRC Customs seizes as many counterfeit goods sent by mail or courier as possible.

*Law stated as at 15 May 2007

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